Market snapshot: rate outlook continues to trouble investors

There's little sign of an end to the current period of nervousness as interest rates look set to keep rising fast. Our head of markets discusses the latest events and share price movements.

Market malaise rumbled on as investors grappled with the likelihood of higher interest rates for longer than had been hoped.

Further comments from a Federal Reserve official suggested that not only should rates in the US rise above 3.5% this year, but any cuts next year were also unlikely. This was followed by the JOLTS report on job openings, reportedly a measure of interest to the Fed, which highlighted extremely tight labour conditions.

With the non-farm payrolls to come at the end of this week, any further strength would underline the Fed’s resolve to plough on with aggressive tightening against a backdrop of an economy which seems relatively unaffected by the hikes so far.

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As investors continued to seek refuge in haven assets, equities were rerated again as the effect of inflation and higher rates increasingly erode the outlook for corporate profits against this challenging backdrop.

Indeed, even though a couple of recent data points have given a glimmer of hope that inflation may be peaking, a continued and measurable trend of similar readings will be required before the Fed considers a change of direction.

In addition, this traditionally quiet time of the year is resulting in lower trading volumes, which in turn tends to exacerbate market moves in either direction.

As such, the high volatility and economic uncertainty that has brought any summer recovery to a halt as investors ponder the alternatives, could well continue. In the year to date, the Dow Jones is now down by 12.5%, while the S&P500 and Nasdaq have lost 16% and 24% respectively.

Asian markets made a valiant attempt to shake off the prevailing pessimism but were for the most part mixed as trading wore on.

In China, factory activity fell less than expected in August, but the outlook remains challenging amid an embattled property sector and ongoing lockdowns, while power issues continue to threaten any thoughts of an economic recovery for the time being. Indeed, the assumption of generally weakening demand has also led to another volatile session for oil, which came under pressure although remaining ahead by 29% this year.

Against this global backdrop, the FTSE100 managed to open higher in early trade, potentially taking some solace from the improving if embattled reading from China.

The oil price also settled after its overnight stumble, giving some stability to the index, while sterling’s current weakness also plays into the hands of the majority of the index constituents, as overseas earnings become more valuable in translation. However, the index remains volatile and could go either way.

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The premier index has retreated slightly in recent sessions to stand flat in the year to date, which provides some potential without any concerns of over-valuation, particularly in historical terms. The absence of high growth shares such as big tech, a headwind for the index in an era of easy monetary conditions such as the last decade, could now be further appreciated by international investors seeking an alternative investment destination.